For Jan Friederich, a senior director at the credit rating agency Fitch, Egypt’s economy is now on track to attract more foreign inflows, with investors more confident about the outlook of the $300bn economy.
“Investors seem to be more confident at the current stage. The reform programme is underway in full swing, and the results have already started to boost the country’s economic indicators,” Friederich told Daily News Egypt in an interview.
“Fuel subsidy reform is a key element of Egypt’s $12bn IMF programme,” Friederich added.
Let’s first take your comment about the performance of Egypt’s economy at the current stage.
I think the economy is reviving, with the government insisting on carrying out its reform programme. On the other side, investors are tracking the progress to inject more cash in the most populous Arab country.
How should these reforms affect the fiscal consolidation for the country?
The new budget and lower electricity and fuel subsidies demonstrate a continued commitment to fiscal consolidation and economic reform, backed by the country’s IMF programme.
Narrowing the fiscal deficit supports Egypt’s sovereign credit profile, but significantly reducing the public debt ratio is a multi-year task.
The government had earlier cut fuel subsidies, in a move that will save around EGP 35bn ($2bn) compared to fiscal year (FY) 2017, when subsidy spending increased owing to the sharp currency depreciation.
Fuel subsidy reform is a key element of Egypt’s $12bn IMF programme.
The government has also followed through on its plan for a fourth round of electricity subsidy reform, lowering the electricity subsidy bill to EGP 30bn, although it has extended the deadline for phasing out electricity subsidies to 2021 from 2019.
Do you think these reforms are enough to persuade investors to come back to the country after years of turmoil?
Cutting energy subsidies at the beginning of the fiscal year gives us greater confidence in the authorities’ willingness to control expenditure and hence in the credibility of fiscal targets.
What about your expectations for Egypt’s finance in the current fiscal year?
The FY 2018 budget aims to reduce the budget sector fiscal deficit to 9.1% of GDP (with a primary surplus of 0.3% of GDP), from an estimated 10.9% of GDP in FY 2017.
Fitch’s forecast of 9.3% (and a primary deficit of 0.3%) implies modest slippage against the target while maintaining deficit reduction.
We think there is scope for stronger-than-budgeted revenues given high inflation and following the introduction of the value-added tax (VAT) last October. The VAT should be a significant source of revenue in FY 2018 due to an increase in the rate to 14%, the full-year effect, and the improved administration of VAT on services.
What should affect you credit rating for the country in the coming period?
Public finances are a key weakness in Egypt’s sovereign credit profile. We estimate that the general government debt/GDP ratio exceeded 100% at end of FY 2017 following the flotation of the Egyptian pound. We forecast a decline to 87.9% in FY 2019, but this is highly dependent on securing a small primary surplus and increasing economic growth.
We think politics presents the key risk to consolidation, which stalled in FY 2016 around the parliamentary elections.
There may be a similar risk ahead of the presidential elections due by May 2018. Measures already legislated for, including civil service reform and the introduction of VAT, together with the IMF programme, provide a stronger policy anchor.
But political sensitivity to the social impact of spending cuts and high inflation still presents implementation risk.
What about your expectations for foreign inflows?
Egypt’s removal of foreign currency transfer limits will help to restore confidence in the economy and attract foreign investments, increasing the availability of foreign currency and helping banks provide more lending needed by foreign currency borrowers, particularly importers.
We expect a greater inflow from foreign investors now that the Central Bank of Egypt (CBE) has ended the $100,000 annual cap on the amount that account holders can transfer outside Egypt.
The removal of the cap, a requirement of Egypt’s lending programme with the International Monetary Fund, should reduce foreign investors’ concerns that investments could be trapped in Egypt.